Henry Schein, Inc. (HSIC) Earnings Call Transcript & Summary

All right, guys, thanks. And I guess, everyone will grab your seats. I am pleased to have Henry Schein with us this morning and joining us, we got the full team on stage, Stanley Bergman, Chairman and CEO; Ronald South, Senior Vice President, Chief Financial Officer; also Andrea Albertini, Chief Executive Officer, International Distribution Group; and Brad Connett, CEO of North America Distribution Group. And I hopefully will have questions across all teams and organizations, and we'll get a deep dive.

Before going into the deep dive, I sort of have a high-level question, Stanley, that I've been asking some of the CEOs and CFOs at the conference. We, sort of, -- maybe a good way of framing it, dental stocks have underperformed since emerging from COVID. To be clear, Henry Schein has held up better than others, but I think it's safe to say the group has struggled. I think as an analyst, you get like a lot of incoming questions across different topics. So investors are asking about value implants, private label, pricing power, that's more subdued relative to other industries. We had animal health companies here yesterday, taking 4%, 5% in price, that's less common certainly in dental. And they're questioning the structure of the market from an investment perspective. I'd love you to maybe just talk about some of those industry concerns. And then more specifically for Henry Schein in your diverse portfolio, how and why are you best positioned to deal with those challenges. A lot there, and welcome.

So Jon, of course, what you're asking is absolutely is the right question. I think from an overall point of view, take a look at where the market was in '19 and look where it is now. And we've seen steady growth. Having said that, there were ups and downs. In our case, there were significant ups because of PPE and [ test ]. We gave that data each quarter. You've got to back that out. Then there was a shortage of product in '19 and in '20, of course, we had the situation in the second quarter of '19, where there were no procedures done, and they had to get to -- catch that up, get those backlog procedures through the system. And then there was a shortage of materials, specifically for equipment, big backlogs. And then we moved into '23, which was sort of much more of a stable year. But I think the market, in many respects, built on the '22 numbers. So I think if I were an analyst, what I would do is take a look at where the market was in '19, look forward, and I think you will see that it's a pretty stable market. There were ins and outs, ups and downs. I think on the equipment side, in particular, there were some manufacturers that took up their pricing quite high during that super inflation period on manufacturing equipment. And some have brought them down, some have not brought them down. So there's been shifts in market share. There've been on the implant side, some procedures that are not doing as well as maybe in '19. But in general, the implant market is doing okay. The endo market is doing okay. We're not big players in orthodontics, but I think you know what's going on there. It's not a terrible market. And generally, it's a stable market, but you have to ex out those variables.

And if we exit those variables and we can bring it to today's world and we sort of focus on the dental trends. I think on the first quarter call, you mentioned the U.S. dental trends improved in March and into April. And we saw that or you experience that both in the U.S. and international markets, I am sure that better exit rate. How is that improvement sort of continued as we think about it currently? The level of improvement that we saw in March into April, has that continued into the month of May?

Yes. We can't talk about exactly what's happening in May. At the moment, obviously, we're in a relatively quiet period. But we have indicated in our previous calls that the market generally is stable. There are some pockets around the world where there's a challenge, but I think the markets, in general, we've said are stable. And we've given some indication on the various categories. We gave indications on equipment, sales, demand. I think we gave some thoughts on implants. And again, I think you have to bear in mind where we were and where we are, '19 versus where we are today and relatively stable market throughout the world.

Okay. I'm going to push a little bit into the distribution business, Brad, maybe I'll start with you. If you could just talk to us about the North American distribution business, the efforts to recapture cybersecurity business in North America. I think the company has called out those episodic customers, the more challenging ones. Maybe talk to us how the recapture is progressing and your ability to win back those customers?

Yes, Jon, thanks for the question. Appreciate being here this morning. The question is a good one, obviously. It was a pretty remarkable recovery given what we went through. I wouldn't wish a cyber attack on our worst enemy. So -- but everybody better be prepared. It's -- nobody is immune from it. I can tell you that right now. So we went through a really trying moment there in the fourth quarter. I mean our web was down for extensive period of time, and the vast majority of orders come through our web. So we went into emergency mode with our omnichannel sales approach. Our reps went back to analog type of business rather than digital. We have an omnichannel approach. So we had our field reps very focused on our customer base to make sure we were getting orders to them via our telesales channel, via our digital revenue channel, via our telemarketing channel, and of course, our old, tried and true merchandising channel. So everybody went into a mode of recovery and making sure we won back our customers. What we found, the data is very clear. Our large customers stayed with us. And that's both in dental and the medical, our large DSOs, our large health systems in the medical side, the upmarket, they stayed with us. They were loyal. We did an enormous amount of work on workarounds to make sure they can continue to do EDI and punchout with us. In that mid-market section, the emerging DSOs actually grew for us. We're winning customers during the time when we were really, again, in a mode of this transaction and same thing in the medical space. Where the erosion, as you pointed out, is what we call our episodic customers. And these customers, quite frankly, were shopping us before cyber, right? They're episodic by their very nature. We don't pretend we have 100% market share. So we get shopped and these customers were looking for -- had to look for alternatives. Keep in mind, our sales force, I just mentioned, was very, very focused on our loyal and high-spend customers. That was the critical part to get back, and we got those back and they're growing. The episodics, we know who they are. We've had really strong campaigns. And in the fourth quarter, I know we referenced in our reports that we did some discounting to get those customers back. We won't win them all back. I'll just be very candid. We are sequentially getting better in every month in this year, winning those customers back. But in the nature of distribution, you're always going to have churn. So as we lose some customers what we always have going for us is where are we selling. We're always filling that funnel. Our sales force and our sales organization was not in an aggressive selling mode in the fourth quarter and even in January. So our team is back selling. Our team is back aggressively going after those customers. We have a unique position to offer them in a time where dentists are very -- particularly, I'll just speak to dentists, are very busy. Our dentists are very busy right now and they're going through that classic squeeze in a consolidating provider market. We've seen this movie in medical. We saw physicians get acquired 20, 15 years. We addressed that. We went to -- changed our go-to-market strategy. Dentists today need our help. We're not just a distributor, a very important distinction. We're a distributor, we're a specialty manufacturer, we're a technology company, we're an education company, we're a sourcing company, the list goes on. And we can go in and talk about revenue generation opportunities for our dentists, efficiency opportunities. I can go on and on with the specific products, but I think I will defer to that.

And on the episodics, is there a way to think about what percent of the revenue they go at and account for?

Yes, we have a really distinct segmentation. So it's -- I don't know if I should say, percentage on that. Ronald do you [ defer ] to that? Or do you want to...

Well, I think one way of looking at it, Jon, it's actually kind of a difficult segment to quantify because of the volatility of the purchasing patterns, right? What we did disclose as part of our Q1 earnings was that we estimated about 300 to 400 basis points of [ integration ] to sales growth as a result of still kind of coming out of that residual impact as we look to recover these particular customers, right? That doesn't necessarily mean they are 3% to 4% of the business. It could be from a number of customer perspective, it could be larger than that, but they buy less than the average customer, right? So on a top line basis, it was about a 300 to 400 basis points.

And I know I'm going to get this question if I probably haven't already in my e-mail. But when Brad sort of says, hey, look, we're not going to get them all back, which seems pretty real world. Ron, is that what you had dialed in walking back to what started at 8% to 12% for the year, now 8% to 10%, is that reflected in sort of that band of, call it, the recapture rate of those episodics?

Yes. I mean we've contemplated that in our guidance. Yes, when we referred to our guidance, we kind of modeled out where we saw some of the recovery rates were, and we were able to kind of hold to our EPS guidance as communicated, and we adjusted the revenue guidance accordingly.

Okay. And then maybe we can move over to the international side of things and similar types of questions, the recapture, how is it progressing? And then what I'd love to hear about is one more difficult than the other. I think Stanley has heard us ask about the recapture on dental versus medical, but how about the recapture of U.S. versus international, if there's any different behaviors there.

Thank you, Jon. So first of all, not all the international market was impacted by cyber. It was our European business. We didn't have any impact on Australia or Asia or South America. For the European business, the dynamics are very similar to what Brad described for U.S. So we were out of our e-commerce. We didn't have technology. So our team had to step in and serve our customer in an analog mode. We did a great job, I believe, in serving the customers, and we secured all the loyal customer, the customer we have a strong relationship with. And we struggle on the episodic customer that takes longer to recover. If you ask other differences between market, I would reply, depends on how long the system took to go back online and how much percentage of online business we used to have in the specific market. So Germany was slightly less impacted than U.K., for example. But overall, we are in a similar situation. We are back in normal business with the majority -- the large majority of our customers, and we struggle a little bit on the episodic customer that take longer. We are using the omnichannel approach that we have. So we have people in the field, getting back customers. We have people on the phone, and we are doing digital marketing that is an important component of this recovery.

Okay. And maybe one or two last questions down this road. Is that window somewhat closing on the opportunity to win back those episodics? And then if I just get murky because you've got a business and people dip in and dip out especially the episodic. But I would think that once you've gone to a different platform, and you've been there for 6 or 9 months, which we're coming up on, do you think it's sort of a later stick when the later stages as the possibilities of getting some of those customers back?

Yes. Brad said it correctly, we will not win all the customers back, but we are going back at business as usual. You lose some customers and you need to get new customers. And our job is to gain new customers, and we are very determined to acquire new customer consistently.

And Jon, that's why we won't be -- we don't anticipate quantifying this effect going forward because to your point, it's very difficult. I mean what assumptions do you make there. Ordinary course of business is we go out, we try to increase our market share. We try to increase our share of wallet with customers and that's what we're doing.

And that might be sort of a good segue in the next question I want to ask. Not often I get the CEOs of the international business, in the U.S. business up here. So in terms of the market, right, Henry Schein's got its competitors in the U.S. and then much more fragmented in the international markets. Maybe talk to -- and for the investors, how your teams work together to leverage Schein's global footprint, that reach in order to drive and win business.

No. First is just my relationship with my colleague here, we're joined at the hip in our distribution business worldwide. So our teams are merged together. We're obviously in very different countries, et cetera. But we're -- some of the specifics, just to give you an example, we're the only dental company in the world that can share data and it has data. And data is a currency, and it's king, as we've heard in many other industries. We have data to share. We are also the only global again, distributor that has partnerships with key supplier partners. And that's an advantage for us, and it's an advantage to the suppliers. We are a global company. So we do a lot of sharing, and I don't like the word best practices because it's a little loosey-goosey, but where teams get together, DSOs are starting to cross borders. They're growing. So as they grow, as they expand and look for opportunities to go across borders, we had one last year, expand up into the north of the Canada. We had that customer here in the States and picked up a very large DSO in Canada as a result. So we see a lot of opportunities there. And again, I would go back to our supplier relationships. We have a team, one of my team, one of Andrea's team that are really together jointly on our supplier relationships. You may have some of the comments.

I think you covered it. We are the only distributor that can cover the globe, and we take advantage of it for the benefit of our customers. We do it in the relationship with our suppliers, but also in serving the customers that are starting to go in multiple geographies. And of course, we share whatever we can internally in terms of tools, in terms of developing new solutions for our customers.

At the end of the day, the global supplier relationship is very important. Certain suppliers who work with globally, work with very well. Data, we define what our mutual goals are. We work together with those suppliers and particularly with certain customers. That's a huge advantage. No one else has that. And the data we have, no one else has that. And so of course, there's practices, but the ability to work closely with certain suppliers and certain customers has been a driver in the profitability growth of our certain suppliers and of Henry Schein.

Interesting comment too on the DSO side, I mean, to your point, up until now, it's really been these massive organizations that are either here or there and not across the border, if you would, I guess, as that occurs more and more frequently, you guys are ideally suited to take advantage of that situation. I'm going to shift in a lot of different topics to try to hit on dental equipment, and we had a panel up here earlier on the high-tech side of things. Stanley, it seems like IOS pricing is stabilized. Tell me if that's accurate. 3D printing is ramping, but it's a relatively low ASP. Just when we look a little bit further down the line specific to high-tech equipment, your thoughts and opinions on the market? And do we need another breakthrough technology to really help drive the overall high-tech equipment and accelerate the growth rates there?

Yes. I don't think, Jon, we need a breakthrough in technology. We need the iPad of dentistry. Everything is in one place.

That's similar comment that we had earlier today, but please elaborate.